Finding the right type of investor
Securing business funding is often a priority for entrepreneurs. A key characteristic of a successful business will be its ability to access capital at key moments in its growth journey.
Outside investment can often unlock new initiatives, for instance: accelerating growth through increased marketing firepower, supporting international expansion, rolling out new services and products, launching a new innovation project and increasing R&D spending.
If your start-up is looking to supercharge growth through additional financing - there are a range of funding options, from venture capitalists, to angel investors, to alternative financing, besides relying on your own money.
But whichever your preferred funding option, be prepared for a long, challenging process - from drafting a compelling equity story to helping you develop a thoughtful business plan, to carefully managing interaction with investors. Luckily for you, these are areas in which Ithaca can help!
Venture capital firms
Venture capital is one of the most prevalent forms of financing for high-growth, early stage companies. In 2021, UK businesses attracted c. $33bn of venture capital funding.
Venture capital funds invest in businesses with certain characteristics: typically, they will invest in specific sectors (such as technology platforms or life sciences), in companies with high growth potential (or that have demonstrated strong growth), that are highly scalable and with a clear exit opportunity.
Venture capital funding can be issued by venture capital investment funds or by corporate venture capital investors. In addition, you can tap into venture debt to optimise your capital structure, reduce dilution or even as a bridge financing tool.
Venture capital equity funds
Venture capital funds will invest in start ups, scale ups or more mature businesses in exchange for an equity stake. Depending on the investment size and stage, they may provide pre-seed funding (for instance in the case of pre-revenue, new businesses), seed funding, Series A, Series B, Series C, Series D or even growth investment funding.
Because venture capital firms are deploying money from a fund, they will have a clear timeframe within which to exit their investment, in order to return money to investors in their fund. Typically, investment horizons vary between three and seven years.
Besides the value from the investment, venture capitalists bring significant financial and operational expertise. Many funds even have designated partners, with a strong entrepreneurial or operating background who will help companies optimise their processes.
Moreover, they unlock useful networks that can support in anything from sales, to R&D needs, to international expansion. Investment from a recognised venture capital fund can also credentialise your start-up.
On the other hand, multiple rounds of venture capital investment can dilute ownership stakes in a company meaningfully. As such, these investors are less suitable for founders who want to retain control of their companies.
Corporate venture capital (CVC)
CVCs will deploy funds on behalf of large corporates and organisations. Unlike traditional venture capital funds, these investors are not always motivated by a financial return. Instead, they often invest in order to advance the interests of their parent corporate companies. Therefore, their investment strategy can be broad and sometimes eclectic.
More 'orthodox' strategies might consist of gaining additional market share, moving up or down the supply chain, benefitting from complementary products or services, entering new markets or even improving financial returns.
Less 'usual' investments could help them access to new technologies, obtain a comparative business advantage or build a defensible position in case the parent corporate's strategy changes. Although they will also work on a time horizon, ranging between two to seven years depending on the maturity of the business, they are less time-driven than venture capital funds.
Venture debt funds
You can complement an equity raise through venture debt. These funds issue structured loans to early-stage, high-growth businesses. These lenders always invest alongside equity investors and never instead of them. Some traditional providers include Silicon Valley Bank, Claret Capital or Kreos Capital.
Often, like venture capital equity funds, these investors deploy capital from funds and therefore operate within the time constraints of a fund's lifetime, in order to return money to investors. The amount and terms of the loans vary, based on factors such as business performance and the amount of equity raised to date, while venture debt loans can be structured either as short-term or long-term capital.
Sometimes these loans have a convertible element to them, which means that they will convert into equity at an agreed date. This allows lenders to finance companies with a risky profile, as the equity holding offers the potential for an outsized return. As convertible loans are easier and quicker to secure than equity fundraising, this can also make them a good source of bridge financing before the next funding round.
As they offer lower cost of capital than equity providers, venture debt can be used to achieve several objectives: from increasing the amount raised in a funding round while avoiding excessive dilution, to extending the runway, to funding inventory, capital expenses or even an acquisition.
Angel investors and private investors
If you are in need of startup funding and venture capital is not an option, an angel investment network might represent an alternative funding opportunity and a great source of capital. They have a high tolerance for risks, which makes them fantastic partners for early-stage startups. In fact, compared to venture capitalists, these private investors only tend to invest in the initial life stages of a business. Having an angel investor on your cap table can give your business credibility when it comes to raising funding from institutional investors down the line.
Because many angel investors have launched successful businesses of their own, besides the money they will often bring human capital and invaluable experience to your business. Some will want to take a more hands-on approach, whereas others will act as more passive investors. There is no right or wrong approach, but as a founder, you should consider which style works best.
An example of an angel investment network is 24Haymarket, Envestors or Newable. These are formed of wealthy individuals actively looking for investment opportunities. Alternatively, you might be able to find angel investors through your personal relationships - so your network is always a useful place to start.
Accelerators and incubators
In the early stages, accelerators and incubators can provide viable mentor-based programs to accelerate your growth.
The focus is on laying solid foundations for your startup, such as achieving product-market fit or developing sensible go-to-market strategies. You will receive training on how to manage a business, how to optimise processes and operations and how to fundraise effectively. This knowledge is passed on through a combination of lectures, workshops and networking, as well as exposure to venture capital firms, investors, other entrepreneurs and advisors.
First-time founders in particular can benefit from this type of support. Taking part in a prestigious accelerator program in itself can be a strong credential when raising funding from investors at a later stage. Well-recognised accelerators include Y Combinator, TechStars, Founder Factory, Startupbootcamp and Axel Springer Plug & Play.
There is a cost associated. The terms vary from accelerator to accelerator, but as a rule of thumb, you can expect a 5% to 10% equity stake for what can be a modest funding amount. Therefore, most of the value is to be found in the program and the connections from the programme.
Equity crowdfunding involves selling shares to a large number of investors, each investing small amounts. Several platforms are used to complete a crowdfund, including Seedrs, Crowdcube or IndieGoGo. These are regulated by the Financial Conduct Authority (FCA) as they can expose retail investors to risky enterprises.
In a crowdfunding round, investors can range from traditional investment firms, to angel investors, to (most commonly) members of the public. Due to the large number of investors, the company will benefit from a marketing benefit and a positive network effect from exposure to the public.
The flip-side is that crowdfunding can present complications for businesses. In fact, having a multitude of small investors, rather than a few sizeable ones, introduces complexity. This can involve liaising with several small investors and missing out on the experience of angel or institutional investors acting as advisors to the company.
How to access grant funding
Business grants and government funding programs can fund early-stage businesses and innovative projects . From R&D tax credits to innovation grants, to small business grants, there is a myriad of cost-free options to help your business grow.
- R&D tax credits allow businesses to claim up to 33% of development costs, including wages and contractor costs in the form of an R&D tax relief or tax credit claim for profitable businesses or as a lump sum when a business is unprofitable. You will need to prove the costs of the development work
- Innovation grants, designed to reward innovative projects. These are often issued by grant funding organisations, such as Innovate UK (make sure to check out Innovate's UK SMART Competition)
Winning grant funding or an Innovate UK grant is a mark of validation for your business. However, in order to qualify for business grants, there are several eligibility criteria that need fulfilling and the application process can be time-consuming.
A small business grant can make a difference by lengthening your runway or reducing the amount of dilution required when next raising capital.
There are several government-backed organisations, grant-awarding bodies, such as Innovate UK, and competitions which can issue government funding in the form of small business grants. Several organisations can help you navigate the grants landscape, for instance Grantify, or even the UK government website. Specifically, if your business is based in Northern Ireland, nibusinessinfo.co.uk offers resources to help you navigate your options.
The difference between grant funding and a loan
Traditional lenders and high street banks are unlikely to provide business loans to high-risk companies, such as a technology or life sciences new business. They will want to scrutinise your company's performance and see evidence of solid annual turnover and healthy cash flow.
In fact, in order to obtain conventional loans, you would need to be able to pay interest and, especially with recent hikes in the BoE and CEB main interest rate, a loan can be harder to achieve and service.
Given the embryonic stage which these companies are often at, interest payment i, which makes them not appealing to traditional lenders. Moreover, they can only receive unsecured business loans, as they do not own many assets that traditional financial institutions can take as collateral.
Small business debt and alternative financing sources
There are also alternative business funding sources, such as a business loan, revenue financing or invoice factoring.
Small business loans
Even as a small business, debt financing options are available.
A common (but limited) option is a credit facility. Your business can draw down and top up as and when needed, offering protection against unforeseen financial issues or falls in performance. The advantage is that interest is charged only on the amount withdrawn (rather than on the whole amount, as is the case for debt), making it less expensive than a traditional loan. The amount is negotiated with the credit provider and depends on company performance, making it available only to cash-generating companies.
Another option is business loans. Depending on how these are structured, they can be short-term or long-term loans and secured or unsecured.
Unsecured loans are arranged without an asset as collateral. Because the lender has limited guarantees, these loans tend to be quite small, normally below £25,000.
Short-term loans are normally issued for up to 12 months and have a high interest rate. They can be used to bring forward growth through increased spend or for capital investment.
The British Business Bank or high street banks can provide small businesses with credit facilities and it is worth exploring what might be available.
However, business loans can be arranged also through peer-to-peer lending. Very much like equity crowdfunding, this involves raising capital from a network of small lenders. Have a look at platforms such as Funding Circle, Crowdstackerand Lending Works.
Invoice factoring consists in selling outstanding invoices to a factoring company (a third financing party) to improve your cash flow and revenue stability. The factoring company will pay the invoiced amount as a lump sum, but purchase at a discounted value (typically 80% to 90%) and will then collect payments from customers directly.
Revenue-based financing is another solution to raise capital. As it is non-dilutive and allows founders to keep control of the company, it is popular in the start-up ecosystem. It also tends to be a faster process than a full raise from venture capital firms. Revenue-based financing is available through specialised providers such as Outfund or Uncapped.
Funding experts who can take you to the next level
If your own business is looking for financial support, our specialists work with start-ups and early-stage companies to assist them in securing funding. Our specialists can work with you and help you manage a project end-to-end, from refining your equity story to managing a process, to interacting with investors to helping you develop a business plan, projecting your cash flow projections and estimating the capital needed to support your growth plan.